UPDATED 4.41PM: Taxpayer funds will no longer be used to pay the Teapot Tapes settlement.

Prime Minister John Key settled the defamation case with photographer Bradley Ambrose, saying the Parliamentary leaders budget would be used to fund a confidential payment.

READ MORE: Teapot tape - the real story of 11-11-11

But after advice from the Parliamentary Service he's done a U-turn, saying the National Leader's Office will pay it instead, moving from taxpayer funds, to money raised by the National Party itself.

The Prime Minister disagrees with those who think he should have to pay personally.  He said it's a "reality" of being a politician that you'll be targeted with legal action, and he can't set a precedent that they pay for it themselves.

"It's not unreasonable that we're protected from that, otherwise you'd be in a position where many people simply wouldn't be able to go into politics."

But, New Zealand First Leader Winston Peters remains unhappy with this most recent development.

He said the public's already been told taxpayer money has been spent on the case.  

"Tell me, could they get away with that?"

The action was brought by Ambrose who alleged the Prime Minister had made comments accusing him of deliberately recording a conversation between Key and then-ACT Party leader John Banks in 2011. 

Ambrose was seeking $1.25 million in court. 

Key had compared Ambrose's actions to those of the now-defunct News of the World newspaper, which was closed due to phone hacking by its reporters.  

In a statement released yesterday, the Prime Minister accepted the conversation was not deliberately recorded, but did not apologise.